February 2019 inventory of 3.05m MT (+1.3% MoM) came as a negative surprise, compared with the consensus estimate of 2.95m MT (-1.8% MoM) and our forecast of 2.86m MT (-4.9% MoM). This can mainly be attributed to a sharper-than-expected drop in exports volume (-21% MoM to 1.32m MT), exceeding both consensus’ and our expectations of a 14% MoM decline. The drop stemmed largely from China (-75% MoM to 80k MT), which likely coincided with fewer working days during the Chinese New Year (CNY) month. On the other hand, the decline was cushioned by a remarkable 41% MoM increase in Indian demand to a multi-year high (since Sep 2014) of 449k MT, as the locals possibly took advantage of the reduction in import levy from 44% to 40% in January 2019. On the production front, an 11% MoM drop to 1.54m MT is largely in line with consensus’ 1.60m MT (-8% MoM) and our 1.52m MT (-13% MoM) estimate. For March 2019, we believe production will decline further by 11.3% MoM to 1.37m MT on seasonality, while exports are likely to improve 10.5% MoM to 1.46m MT after the CNY month. All-in, we anticipate supply of 1.45m MT to fall short of demand of 1.78m MT, leading to lower ending stocks of 2.72m MT (-10.6% MoM) in March 2019. Besides easing inventory, other near-term positives for the sector are: (i) biodiesel initiatives in both Indonesia and Malaysia, (ii) reduction of India’s import levy on CPO from 44% to 40% and (iii) slowing production in Indonesia as palms take a rest post-bumper harvest. Premised on these potential developments, we reiterate our 2019 CPO price forecast of RM2,400/MT (vs. YTD average of RM2,048/MT), representing a 7% increase from RM2,235/MT in 2018. Notwithstanding, we maintain our neutral outlook on the sector as uncertainties vis-à-vis trade war prevail. For investors who would like to gain exposure to the plantation sector, we recommend TSH (OP; TP: RM1.30), our only OP call, due to its above-average production growth outlook of +12% (vs. industry average of +5%), its higher earnings sensitivity to a potential CPO price recovery, if any, and it is the only pure upstream planter under our coverage that is still profitable.

February 2019 inventory of 3.05m MT (+1.3% MoM) came as a negative surprise, compared with consensus estimate of 2.95m MT (-1.8% MoM) and our forecast of 2.86m MT (-4.9% MoM). This can mainly be attributed to a sharper-than-expected drop in exports volume (-21% MoM to 1.32m MT), exceeding both consensus’ and our expectations (-14% MoM). The drop stemmed largely from China (-75% MoM to 80k MT), which likely coincided with fewer working days during the Chinese New Year (CNY) month. On the other hand, the decline was cushioned by a remarkable 41% MoM increase in Indian demand to a multi-year high (since Sep 2014) of 449k MT, as the locals possibly took advantage of the reduction in import levy from 44% to 40% in January 2019. On the production front, an 11% MoM drop to 1.54m MT is largely in line with consensus’ 1.60m MT (-8% MoM) and our 1.52m MT (-13% MoM) estimate.

March 2019 production to fall further by 11.3% MoM to 1.37m MT. Production had peaked in October 2018 and started slowing down for four consecutive months. We expect this trend to continue through March with an unusual decline of 11% to 1.37m MT vs. a typical 16-17% increase during the month, given that last month’s production remained exceptionally high at 1.54m MT vs. 5-year February average of 1.21m MT.

Exports to improve by 10.5% MoM to 1.46m MT in March 2019. We expect demand from China to recover sharply after registering a low base during the CNY month. On the other hand, exports to India could see some retracements from a high base as the buying frenzy arising from lower import tax dissipates. Meanwhile, we expect demand from the EU region to remain stable given the recent recovery in crude oil prices, which makes CPO more attractive for feedstock in biofuels. Overall, we believe exports volume will improve 10.5% MoM to 1.46m MT in March 2019.

March 2019 stocks to ease by 10.6% MoM to 2.72m MT. All-in, we anticipate supply of 1.45m MT to fall short of demand of 1.78m MT in March 2019, leading to lower ending stocks of 2.72m MT (-10.6% MoM). Besides easing inventory, other near-term positives for the sector are: (i) biodiesel initiatives in both Indonesia and Malaysia, (ii) reduction of India’s import levy on CPO from 44% to 40%, and (iii) slowing production in Indonesia as palms take a rest post-bumper harvest. Premised on these potential developments, we reiterate our 2019 CPO price forecast of RM2,400/MT (vs. YTD average of RM2,048/MT), representing a 7% increase from RM2,235/MT in 2018.

Maintain NEUTRAL. Despite expected improvements in CPO prices, we maintain our neutral outlook on the sector as uncertainties vis-à-vis trade war prevail, which continue to hurt the industry’s sentiment and cap further upsides to CPO prices beyond our assumptions. For investors who would like to gain exposure to the plantation sector, we recommend TSH (OP; TP: RM1.30), our only OP call, due to its above-average production growth outlook of +12% (vs. industry average of +5%), its higher earnings sensitivity to a potential CPO price recovery, if any, and it is the only pure upstream planter under our coverage that is still profitable.

Source: Kenanga Research - 12 Mar 2019